It is repeated many times in the life insurance industry that the only way to beat a life insurance policy is to die. Certainly, a tax-free death benefit available to your loved ones will be much appreciated and, in many cases, is a much-needed benefit the day you leave this earth. However, you’ll be gone and not able to enjoy the benefit, so the much-coined phrase, “I have to die to beat my life insurance policy,” should probably be rephrased to say, “I have to die for me to enjoy the benefits of a life insurance policy.”
But even this is not the case, and the following is an example of how you, still alive, can enjoy the benefits of a life insurance contract.
Let’s say you had an uncle named Harry, who was up in years, in poor health, and you received a letter from him indicating he was planning on leaving you $1 million when he died. In your own planning for retirement, you decided you could live on $5,000 per month. However, now that you received this letter from your now favorite uncle, your idea now is to live on $7,500 per month, knowing the check from Uncle Harry would be available sometime soon. You accelerated your retirement income while you were alive, and enjoyed your retirement years with your loved ones, knowing a windfall of money was forthcoming.
Now most of us do not have an Uncle Harry, but most of us do have the opportunity to create that windfall of money through a life insurance contract. Knowing this money would be available at your death, you have the ticket to spend more now, while you are still living. And the biggest difference between Uncle Harry’s check and a life insurance policy check is that, under most circumstances, the life insurance death benefit would have no taxes or interference from Uncle Sam. So you don’t have to die to beat the life contract; it affords you the opportunity to enjoy the benefits of life, knowing loved ones will be taken care of when you’re gone.
Taking this example to another level for those who have a pension plan (KPERS would be a good example), your life insurance coverage should be taken into consideration when you pick an option with your pension plan. Most people who are married automatically pick a joint option that allows them to receive a benefit, but if they die, allows their spouse to receive a benefit also.
Many times people say they do not believe in life insurance and then they pick a joint option with their pension plan. Ladies and gentlemen, you just purchased a life insurance policy — a very expensive one. Allow this to be explained to you: Let’s suppose the maximum benefit option (life only) pays $2,000 per month. This is a benefit only for you, and when you die, it’s over. This leads many married employees to opt for the joint option. In this example, it pays $1,500 per month, with the understanding that if you die, your spouse will get the same $1,500 per month. So the cost to provide a benefit for your spouse when you die is $500 per month. That $500 difference per month is actually a premium paying for a benefit when you die. That is life insurance. Only the screening for this is minimal. (Normally, you and your spouse’s dates of birth, your salary and years of service is all that’s required). If the screening is minimal, imagine what the rates for the life insurance would be?
Because every situation is different and there are many factors that enter into this decision, (e.g. health, mortality history, etc.) it would certainly be worth visiting with your adviser to see how your pension plan and life insurance coverage can work together toward a successful retirement.
Tim Schumacher represents Strategic Financial
Partners in Hays.